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Gold and especially silver
have succumbed to a long a demoralizing correction over the last 12 to 18
months. The summer doldrums likely marked the bottom of this correction, and
the metals have turn the corner higher. However,
both gold and silver investors will likely have their resolve tested once
again in the coming weeks before the metals are able to break higher.
Precious metals (GLD, SLV), and mining equities
surged from their 2008 lows to their 2011 highs in reaction to massive
monetary intervention, and an initial surge in inflationary expectations.
Although interest rates have remained near zero, and real interest rates are
clearly negative, precious metals investors have been disappointed by the
ongoing global stagflationary wealth destruction,
and the failure of further intervention by policy makers. The Federal Reserve
has admitted that the US economy is weaker than desired, yet it has also
continually disappointed in announcing a new quantitative easing as it seeks
political justification.
The last two years of global policy makers
kicking the can down the road, in conjunction with weaker demand from India,
has created the environment for a severe correction in gold, silver, and
miners. While it hasn't been the most severe in terms of percentage loss, it
has likely been the most severe in terms of sentiment. With Europe, India,
China, and the US all decelerating at a rapid pace, and the US fiscal cliff
returning the political forefront, we believe that we are months away at the
most from a turn in monetary policy. Verbal intervention has run its course,
and real monetary intervention is a mathematical certainty.
Gold miners(GDX)
bottomed in May, and are leading the metals. They are now overbought and
could face a sharp correction before breaking out.
Gold and silver may already have begun pricing in
future intervention, however commercial banks are
not yet on board with the breakout in gold and silver. Net commercial short
positions in both gold and silver, at a time when prices are near resistance
levels and overbought are indicating that a short and severe correction could
be imminent.
Silver has had an especially large spike in
commercial short positions over the last three weeks.
The current commercial short positions in silver
and gold must be reduced before the metals can break higher. In other words,
commercial banks must cover the majority of their short positions. While they
could cover as prices rise, history suggests that the most likely scenario is
for the commercial banks to take down the price and cover at lower levels.
This correction will likely coincide with the realization of a global
recession/depression in 2013 and end with the realization of further monetary
intervention.
Chris Mack
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